Cambodia and ASEAN Economic Community

The 10 economies that make up the Association of Southeast Asian Nations (ASEAN) are slated to establish one single market and production base by 2015.

The move is aimed at creating a highly competitive economic region that will become a significant player in the global economy. But as 2015 is only a few years from now, questions are being raised about whether Cambodia is ready to fully participate in the ASEAN Economic Community (AEC). While Cambodia appears to have the proper policies and regulations in place for the planned integration, issues need to be addressed in such areas as the quality of some of the country’s products, production capacity, labor productivity and public administration.

“In terms of whether Cambodia is prepared, I think partly no, partly yes,” said Dr. Sok Siphana, advisor to the Cambodian government and to the Supreme National Economic Council (SNEC).
Cambodia meets all of the policy and regulatory requirements, he said. “In terms of what’s on paper—policies, laws, regulations—Cambodia is likely ready,” Sok Siphana said.

The AEC Scorecard prepared a list of the member countries in terms of readiness when it comes to legal and policy frameworks and ranked Cambodia third after only Singapore and Malaysia, he pointed out, adding that Cambodia’s entry into the WTO in 2004 was a big boost in terms of economic policy and trade liberalization policy. But there is a lot more than just having all the legal and policy-related paper work in order to get ready for becoming part of the planned trading bloc.
“I said partly no because I feel that our private sector has not fully appreciated the full potential from this regional economic enlargement. They have to make efforts to understand better the new business opportunities as well as the implications. I am of the firm view that more public private sector dialogue needs to take place to ensure that our business communities can better prepare themselves for the eventual ASEAN Economic Community”, sok Siphana added.

Cambodia is not ready for AEC in 2015 given its development status compared to the six older ASEAN members, said Poch Kongchheng, a researcher at the Economic Institute of Cambodia.
There are numerous constraints that Cambodia needs to address if it wants to have a successful integration into AEC 2015. While the quality of the Kingdom’s agricultural products and garments and textiles is sufficient, the quality of some other products is not so good, said Chheang Vannarith. And there are problems with the country’s public administration, labor productivity and production costs.

“Cambodia public administration is regarded by the private sector as not yet being effective and efficient. Labor productivity remains relatively low, and the cost of production is relatively high-particularly energy and transportation costs”, said Chheang Vannarith.

While there has been an improvement of human resources, Cambodia still lacks a sufficient level of skilled labor to compete with other ASEAN members, said Poch Kongchheng, a researcher at the Economic Institute of Cambodia. Production costs are considerably high compared to neighboring countries and other ASEAN members. “For example, the cost of electricity, which is the major production input, in Cambodia is significantly higher than in Vietnam and Thailand.

Cambodia’s status as a country that imports a lot more products than it exports is another problem. Garment and textile products currently account for the majority of its total exports, and its main markets are the US and the European Union. Moreover, Cambodia’s exports to ASEAN countries are mostly agricultural products in the form of raw materials.

“In this regard, Cambodia does not have many goods for exporting to other ASEAN countries while imports keep increasing. Hence, its trade deficit is anticipated to significantly enlarge in terms of trade in the ASEAN region”, said Chheang Vannarith.

All that said, some experts suggest Cambodia needs to do more in the area of economic reform.

“First of all, Cambodia needs to speed up the economic reforms by focusing on export and investment facilitation through the strengthening of good governance, infrastructure development, human resources development plus its research and development capability”, said Chheang Vannarith.

Secondly, public-private partnerships (PPPs) need to be further developed so that strong partnerships can be achieved between the public and private sectors. Thirdly, the private sector needs more support from the state and donor agencies in developing capacity, financing, technological development, and market research analysis, he said.

“Fourthly, a knowledge-based economy needs to be introduced and gradually implemented through improving the educational system with a focus on innovation, creativity, and entrepreneurship. The last one is that the components industries needs to be developed in order to integrate Cambodia into the regional production network”, Chheang Vannarith.

Costs and benefits for Cambodia

The establishment of ASEAN’s single market and production base in 2015 is expected to bring both benefits and costs for Cambodia.
The costs would come with a reduction of revenue from tariffs and flow of imported products from other countries, which would impact small and medium enterprises in Cambodia. “Revenue from tariffs is expected to reduce revenue and an influx of imported products may threaten infant industries in Cambodia. Moreover, laborers from other ASEAN countries may come and replace Cambodian laborers for some jobs”, said Poch Kongchheng. But exports of raw materials could also benefit given that Cambodia will be part of an ASEAN-wide supply chain.

“Another cost that we have to think about is being part of an ASEAN production supply chain. Cambodia has a lot of raw material such as rubber. So, why do we want to export our raw rubber at a lower price to other countries in the region when we can attract foreign investment to process, or at least semi process, them to add high value and this is now possible because we are part of the larger regional value chain”, added Sok Siphana.
The AEC agreement will bring benefits in the form the generation of economic activities. “I suppose this is a free trade agreement, I believe AFTA is a very good chance for Cambodia”, said Suzuki Hiroshi, CEO Chief Economist of BRIC.
Many varieties of goods at lower prices are expected to be available to Cambodian consumers. Moreover, Cambodia would be able to attract more FDI because AEC constitutes a big market, said Poch Kongchheng. “In particular, the anticipated big market may cause an increase in economic activity and production in Cambodia”, he added.

Sok Siphana sees more advantages than disadvantages. With the current economic “barrier” in place, Cambodia’s market is limited to its smaller population of 14 million. But once those barriers lifted, Cambodia will be part of a much larger ASEAN economic community, but more relevantly, the Greater Mekong Sub regional Group that includes a market of 200million with its immediate neighbors like Vietnam, Thailand and Laos, he said.
“Why do I say that? Because I have already seen a positive trend in that direction where some multi-national companies have begun setting up their subregional headquarters in Cambodia covering operations in Vietnam, Thailand and Laos” said Sok Siphana.
The development of the AEC is really about how each country can optimize the benefits that are expected to be generated by the integration, Chheang Vannarith.
“The ASEAN Economic Community is a window of opportunity for Cambodian entrepreneurs to explore opportunities. Of course we cannot avoid competing with others in such a context of a regional integration process, but what we can do now is to know what we have and how we can compete”, he said.
The member countries of the trading block should let the market determine the fate of an ASEAN Economic Community, Chheang Vannarith said. “The state can just support and create a good environment for the market to grow itself”.

Cambodia’s trade with ASEAN

The reduction of tariffs on ASEAN trade has been accompanied by a rapid expansion of Cambodia’s trade with its ASEAN partners.
From 2006-2008, Cambodia’s exports to ASEAN countries increased by an average annual rate of 37 percent compared with an average rise of 14percent in its exports to the rest of the world.
“Moreover, imports from ASEAN also rose rapidly, the increase averaging 25 percent for imports from the rest of the world”, Hang Chuon Naron, Secretary-General of the Supreme National Economic Council of Cambodia, said at a regional conference on CLMV countries and the ASEAN Economic Community (AEC) 2015: Bridging the development Divide, on Nov 28.
“For Cambodia, however, the growth of intra-ASEAN trade is occurring from a small base: despite its expansion, in 2008, exports to ASEAN accounted for only 7 percent of the value of Cambodia’s total exports”, he said.
In 2009, Cambodia’s exports to ASEAN increased, which somewhat offset the problem of the drop in exports to North America, Hang Chuon Naron said. As well, the share of customs duties in total tax revenue declined from 21.9 percent in 2004 to 16.9 percent in 2010.

Entrepreneurship and asean integration

The establishment of the AEC in 2014 is expected to pave the way for many opportunities for entrepreneurs. “Then ASEAN Economic Community is integrating reforms that amount to mutual benefits for ASEAN countries. It will help to increase competition in region”, said Rithy Sar, Chairman of World Bridge, a logistic solutions provider in Cambodia. “Our company will benefit with a free flow of human resources, goods and services, capital”.
He said, for instance, that with ASEAN economic integration, his company would not have to store any of its goods in Singapore as a way of cutting transportation costs.

Getting youth ready to compete in AEC

As ASEAN gears towards integration into an economic community starting in 2015, Cambodia’s education sector is faced with the task of ensuring Cambodian youth are able to compete in business activities in the region.
“I believe that our current youth are really competing in the workplace with other ASEAN Countries for the upcoming ASEAN Community”, said Ken Chanthan, CEO of the Ken Group and President of the Young Entrepreneurs Association of Cambodia during global Entrepreneurship Week 2011: Startup Cambodia on Nov 14 at Cambodia Japan Cooperation Center (CJCC). “But youth must increase their abilities through learning, social activities, volunteering and finding social knowledge-that is ‘life university’”.
Youth in Cambodia today are showing more potential when it comes to being creative and innovative in their approach to employment. Many care creating their own jobs such as creating their own websites, he said.
You Sokunthea, a second-year English literature student at Norton University, feels that the youth of her generation are up to the task of competing with their counterparts in other ASEAN countries. “I believe that current youth nowadays have the ability and they can surely compete with other citizens in the ASEAN community”.
It will be important for Cambodian youth to take advantage of the economic integration of the AEC” said San Sokreangsey, a fourth-year accounting student at Norton University. “In order to compete with others ASEAN countries, Cambodian youths should try to study hard…It is really important because it will increase their abilities and learning and give them hope for a better life in the future”.
Bridging the development divide
In order to successfully establish the AEC in 2015, ASEAN countries will need to strengthen and accelerate the integration of the four countries with other six ASEAN members in order to narrow the development gaps.
“The reduction of development gaps among ASEAN member states is a prerequisite condition in order to insure competitiveness and to achieve regional integration”, Prime Minister Hun Sen said at the AEC conference on Nov 28. Closing the gaps will require a lot of resources, he said, nothing that the Asia Development Bank estimates that Asia Pacific countries will need to invest about US $8 000 billion over the next decade.
Bridging the development divide is among the most pressing challenges facing the successful establishment of AEC by 2015, said K Kesavapany, Director of the Institute of Southeast Asian Studies, at the Nov 28 conference. “Many of the ASEAN countries do not even have a competition policy in place. Last but not least, inadequate human resources and infrastructure, both physical and institutional, threaten the timely materialization of AEC 2015”.